Punch Taverns' £4.5bn debt makes suppliers wary

Punch Taverns has been forced to admit that its suppliers are having
difficulty obtaining credit insurance because of the pub operator's massive
debt burden.

By Alan Tovey

6:54PM BST 21 Jun 2009

The company launched a £350m placing last week to enable it to make repayments on its £4.5bn debt. The prospectus for the capital raising – a 50pc firm placing and 50pc offer of new shares at 100p – spelled out the difficulties the pub company's suppliers are facing.

Punch Taverns

"The group's level of debt can create operational difficulties," the statement said. "Following the ratings downgrade of some of the notes issued under the group's securitisations, it has become more difficult for some suppliers to obtain credit insurance, increasing the risk of suppliers no longer willing to contract with the group or requesting shorter payment terms."

Punch, the UK's largest pub operator with more than 8,000 licensed premises, added that the perceived risk of supplying it could have a knock-on effect that would drive up its costs.

"There is also a risk that ratings downgrades of the notes... could increase related ancillary finance costs, such as the cost of the financial guarantees of those notes."

The company, which has a market value of £282m, said it planned to use the majority of the proceeds from the cash call to purchase £215m of convertible bonds maturing in December 2010. The remainder, expected to be around £140m, will be used to reduce other securitisations and provide headroom on debt covenants.

Punch built up the majority of its debt after acquiring Spirit Group for £2.7bn in 2006. It has been battling to cut its debts, cancelling dividend payments and selling more than 311 properties for £171m since the start of the financial year.

A spokesman for Punch played down the statement. "It is an industry-wide issue with suppliers not being able to get credit insurance. It is in the risk factors of the prospectus which details everything which could go wrong."